Resolute Mining Faces Challenging Times Ahead

• Resolute Mining has a long history in Africa, starting in 1996 with investments in Tanzania and Ghana. Over time, they developed several successful assets, such as the Golden Pride mine in Tanzania and Obatan in Ghana. They acquired the Syama mine in 2004 and more recently sold the Bibiani mine, which they had acquired in 2000.
• The last 12 months have seen major changes in personnel at the board level, with Peter Sullivan retiring and being replaced by Adrian Reynolds. Other key executive appointments have also been made. Due to COVID-19, there's been a shift towards employing more locals in Africa rather than Australians. The Syama operation has seen high performance, and several productivity and efficiency initiatives have been adopted.
• Resolute's revenue was about $260 million, with EBITDA at $78 million. Although there were some significant non-cash charges leading to a net loss, the company repaid about $30 million of debt during the June quarter. They also have a robust resource and reserve, with 8.5 million ounces of resource, even after accounting for the sale of Bibiani.
• The Syama underground mine had its best production performance during the last quarter. Challenges revolved around grades, but they focused on maintaining production performance. There's also an ongoing repayment journey, and exploration efforts at Syama and Mako are promising.

Resolute Mining Faces Challenging Times Ahead

Resolute Mining has had a long history of gold mining operations across Africa since 1996. However, the company now faces a difficult market environment, with little chance of significant share price gains in the next year. Investors should temper expectations amidst macroeconomic headwinds.

Operations Update

Resolute has seen several changes in personnel over the last 12 months. Long-time CEO Peter Sullivan retired and was replaced by Adrian Reynolds, who brings extensive African mining experience from his time at Randgold Resources. The company also hired a new CFO, Doug Warden.

Additionally, Resolute is hiring fewer Australian expats and more Africa-based talent to cut costs. The company claims this has led to improved operations. For example, the Syama underground mine in Mali had record production in Q2 2021. The Syama sulfide processing circuit also ran at peak capacity. However, Syama did suffer from lower-than-expected grades in Q2.

Resolute's Mako mine in Senegal continues to perform consistently, despite an ongoing cutback to extend mine life. Mako delivers low-cost gold production, averaging around $1,000 per ounce all-in sustaining costs (AISC). A planned cutback reduced output in H1 2021 but will add about 2 more years of production. The Bibiani sale in Ghana to Asante Gold Corporation was finalized in June 2021. Resolute has received $30 million upfront, with another $60 million in deferred payments over 12 months. The company also stands to receive $250 million from the Ravenswood mine sale in Australia beginning in March 2024. However, Ravenswood's new owner, EMR Capital, faces production challenges.

Financial Results

For the first half of 2021, Resolute reported gold production of 152koz at an average realised price of $1,733/oz. This drove revenues of $263 million and EBITDA of $78 million. Operating cash flows were $69 million. The company reported a net loss of $21 million, largely due to asset impairments.

At the end of June, Resolute held cash of $78 million and debt of $280 million, down $30 million after recent repayments. The debt facility includes a $150 million revolver, providing additional liquidity. Resolute has $88 million of hedges in place at an average price of $1,721/oz.

Long-Term Outlook

Resolute forecasts annual gold production of ~300koz from its Syama and Mako mines over the next decade, assuming no other growth projects. Production is expected to remain over 200koz per year through 2031. However, Syama's low-cost oxide production will decline after 2023 without new discoveries.

Cost guidance is approximately $1,000/oz all-in sustaining costs for the next 10 years. This demonstrates Resolute's assets are on the higher end of the global cost curve. There is limited potential to materially reduce costs or meaningfully increase production with the current portfolio.

Growth Potential

Syama has a large sulfide resource base, but major expansion capital is on hold. Reserves stand at 5.2 million ounces with only 2.4 million ounces currently in the mine plan. The sulfide processing plant has significant excess capacity, but underground mining limits throughput. Improving development rates and stoping productivity are critical to increasing sulfide production. The Syama Greenstone Belt also provides exploration upside. Recent drilling at the Tabakoroni project, 30km south of Syama, has extended high-grade mineralization outside the current resource. An updated resource estimate is expected by year-end. Oxide discoveries at Syama North could also prolong open pit operations beyond 2023.

At Mako, near-mine exploration is focused on extending the 6-year mine life. Early drilling results are encouraging, with potential resource additions from the Gambia area northwest of the mine. Resolute also has strategic investments in several West African exploration companies.

Resolute Mining has quality assets and a strong potential for resource growth. However, the company faces an uphill battle to significantly lower costs or materially increase production in the near term. With challenging market conditions, investors should not expect a rapid re-rating of Resolute's share price. Delivering consistent operational results and exercising capital discipline will be key to rebuilding confidence over the long run.

Factors That Could Hamper Resolute's Share Price Recovery

Cutbacks - The cutback at the Mako mine in Senegal has reduced production in the short term. While this extends mine life by about 2 years, it means less gold output in 2021-2022. With lower production, costs per ounce rise and profitability declines.

Lower grades - Grades were lower than expected at Syama in Q2 2021. This directly impacts the amount of gold produced and the revenue generated. Persistent grade issues could lead to further production shortfalls.

Higher costs - Resolute's mines are relatively high cost with all-in sustaining costs guidance of around $1,000/oz. In a low gold price environment, margins get squeezed at higher-cost operations. There is limited potential to significantly reduce costs in the near term.

Large debt - Resolute carries $280 million in debt, with only $78 million in cash. Servicing and repaying this debt is a drag on cash flows. The debt also limits financial flexibility and increases risks, especially if gold prices fall.

Difficult backdrop - Gold prices have pulled back from 2020 highs. Markets face risks from rising interest rates and inflation. This backdrop tends to be negative for gold mining equities, limiting chances of a re-rating.

With Resolute Mining producing less gold at higher costs while carrying significant debt, it will be difficult to substantially improve profitability in the near term. Unless the gold price rallies strongly, these factors likely restrict a significant upside in Resolute's share price over the next 6-12 months.